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THOROUGH COSTING
Q1
For 20x4, Nichols, Inc. had sales of 75,000 units and production of 100,000 units. Other
information for the year included:
Direct manufacturing labor
Variable manufacturing overhead
Direct materials
Variable selling expenses
Fixed administrative expenses
Fixed manufacturing overhead
$187,500
100,000
150,000
100,000
100,000
200,000
Compute the ending finished goods inventory under both absorption and variable costing.
Compute the cost of goods sold under both absorption and variable costing.
Answer:
a.
Direct materials
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
Absorption
$150,000
187,500
100,000
200,000
$637,500
Unit costs:
$637,500/100,000 units
$437,500/100,000 units
b.
$6.375
$4.375
Ending inventory:
25,000 units x $6.375
25,000 units x $4.375
$159,375
$478,125
Difficulty: 2
Variable
$150,000
187,500
100,000
0
$437,500
$109,375
$328,125
Objective:
Q2 . Bruster Company sells its products for $66 each. The current production level is 25,000 units,
although only 20,000 units are anticipated to be sold.
Unit manufacturing costs are:
Direct materials
Direct manufacturing labor
Variable manufacturing costs
Total fixed manufacturing costs
Marketing expenses
$12.00
$18.00
$9.00
$180,000
$6.00 per unit, plus $60,000 per year
Required:
a.
Prepare an income statement using absorption costing.
b.
Prepare an income statement using variable costing.
Answer:
a.
Absorption-costing income statement:
Sales (20,000 x $66)
Cost of goods sold (20,000 x $46.20*)
Gross margin
Marketing:
Variable (20,000 x $6)
Fixed
$1,320,000
924,000
$396,000
$120,000
60,000
Operating income
180,000
$216,000
$1,320,000
$780,000
120,000
900,000
$420,000
$180,000
60,000
240,000
$180,000
Difficulty: 2
Objective:
During the first year, 20x1, it had no sales but incurred $120,000 in variable manufacturing
expenses and $40,000 in fixed manufacturing expenses.
In 20x2, it sold half of the finished goods inventory from 20x1 for $100,000 but it had no
manufacturing costs.
In 20x3, it sold the remainder of the inventory for $120,000, had no manufacturing expenses and
went out of business.
Marketing and administrative expenses were fixed and totaled $20,000 each year.
Required:
a.
b.
Answer:
a.
b.
20x1
$0
0
20x2
$100,000
80,000
20x3
$120,000
80,000
$0
20,000
$20,000
20,000
$40,000
20,000
$20,000
20x2
$100,000
60,000
20x3
$120,000
60,000
$40,000
$60,000
$
$(20,000)
20x1
0
0
Contribution margin
Fixed expenses:
Manufacturing
Marketing and administrative
$40,000
20,000
Total fixed
$60,000
$20,000
$20,000
Operating income
$(60,000)
$20,000
$40,000
Difficulty: 3
Objective:
0
20,000
0
20,000
Q4 . Jarvis Golf Company sells a special putter for $20 each. In March, it sold 28,000 putters while
manufacturing 30,000. There was no beginning inventory on March 1. Production information
for March was:
Direct manufacturing labor per unit
Fixed selling and administrative costs
Fixed manufacturing overhead
Direct materials cost per unit
Direct manufacturing labor per hour
Variable manufacturing overhead per unit
Variable selling expenses per unit
15 minutes
$ 40,000
132,000
2
24
4
2
Required:
a.
b.
c.
Compute the cost per unit under both absorption and variable costing.
Compute the ending inventories under both absorption and variable costing.
Compute operating income under both absorption and variable costing.
Answer:
a.
Absorption
Direct manufacturing labor ($24/4)
$ 6.00
Direct materials
2.00
Variable manufacturing overhead
4.00
Fixed manufacturing overhead ($132,000/30,000)
4.40
Total cost per unit
Variable
$ 6.00
2.00
4.00
___0
$16.40
$12.00
Absorption
$0
Variable
$0
$492,000
_______
$360,000
$492,000
$360,000
$459,200
_______
$336,000
Ending inventory
$ 32,800
$ 24,000
b.
Beginning inventory
Answer:
c.
Absorption-costing income statement:
Sales (28,000 x $20)
Cost of goods sold (28,000 x $16.40)
$560,000
459,200
Gross margin
Less:
Variable selling and administrative
Fixed selling and administrative
100,800
$56,000
40,000
Operating income
96,000
$ 4,800
$560,000
$336,000
56,000
Contribution margin
Fixed costs:
Manufacturing
Selling and administrative
168,000
$132,000
40,000
Operating income
Difficulty: 2
392,000
172,000
$ (4,000)
Objective:
Q5 . Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200 equal size
lots.
As the lots are sold, they are cleared at an average cost of $5,000.
Storm drains and driveways are installed at an average cost of $8,000 per site.
Sales commissions are 10 % of selling price.
Administrative costs are $850,000 per year.
The average selling price was $160,000 per lot during 20x2 when 50 lots were sold.
During 20x3, the company bought another 2,000-acre island and developed it exactly the same
way. Lot sales in 20x3 totaled 300 with an average selling price of $160,000. All costs were the
same as in 20x2.
Required:
Prepare income statements for both years using both absorption and variable costing methods.
Answer:
Cost per site:
Land cost $10,000,000/200 sites
Clearing costs
Improvements
Total
Absorption-costing income statements:
Sales
Cost of goods sold:
50 x ($50,000 + $8,000 + $5,000)
300 x ($50,000 + $8,000 + $5,000)
Gross margin
Variable marketing
Fixed administrative
Operating income
Variable-costing income statements:
Sales
Variable expenses:
Cost of operations:
50 x $13,000
300 x $13,000
Selling expenses
Contribution margin
Absorption
$50,000
5,000
8,000
Variable
$0
5,000
8,000
$63,000
$13,000
20x2
$8,000,000
20x3
$48,000,000
3,150,000
________
18,900,000
$4,850,000
800,000
850,000
$3,200,000
$29,100,000
4,800,000
850,000
$23,450,000
20x2
$8,000,000
20x3
$48,000,000
650,000
800,000
3,900,000
4,800,000
$6,550,000
$39,300,000
Fixed expenses:
Land
Administrative
Operating income
Difficulty: 3
10,000,000
850,000
$(4,300,000)
Objective:
10,000,000
850,000
$28,450,000
Q6 . Megredy Company prepared the following absorption-costing income statement for the year
ended May 31, 20x4.revise
Sales (16,000 units)
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating income
$320,000
216,000
$104,000
46,000
$ 58,000
$320,000
$176,000
24,000
$43,750
22,000
200,000
$ 120,000
65,750
$ 54,250